Using 457 for emergency funds

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Hoosier CPA
Posts: 114
Joined: Tue Nov 22, 2016 9:43 pm

Using 457 for emergency funds

Post by Hoosier CPA »

Sorry if this was addressed in another thread - I couldn't find it by searching.

This pandemic has made me re-think the amount of funds I keep on hand for emergencies. I haven't focused on this previously, keeping only about a month or two on hand in cash, at most. My main concern in increasing the amount of these funds is for the event of a job loss - I think I could figure out how to cash flow most other things, provided the paychecks keep coming in. I would like to increase liquidity.

As I look at my finances, for me to increase my short-term savings quickly, the funding would likely have to come out of the money I currently have going into a 403b fund. I've been hesitant to do this, in part because I hate to pay the extra income taxes that would result from decreasing the deferral. Also, if cash is in the bank, it sometimes finds a way to be spend. I work for a mammoth hospital non-profit where I have a 457 plan available. Would you see any issues in using a 457 for a portion of emergency fund savings? The way I see it, in the event of a job loss, I'd could then pull the funds from the 457 as needed. Yes, I'd pay the taxes then, but it would be at a time where I didn't have regular income at the same time.

Another option would be to put the funds in a ROTH, as I'm not currently contributing to one. Either way, I'd keep out of stocks or anything volatile. EDIT: The thought behind using the ROTH would be that while I'm paying the income taxes currently, I'd at least be getting the tax advantages of the ROTH in the event I didn't need later. If needed I could pull the contributions out.

To put it another way, I'm trying to figure out the best approach to increasing emergency funds and would appreciate any suggestions. Bite the bullet and pay the taxes now or try to get more creative with it.
Last edited by Hoosier CPA on Mon Apr 27, 2020 2:21 pm, edited 2 times in total.
Balefire
Posts: 101
Joined: Thu May 04, 2017 10:17 am

Re: Using 457 for emergency funds

Post by Balefire »

My emergency funds consist of
1. Online high yield savings account
2. Taxable investment funds
3. Backdoor Roth IRA
4. Non governmental 457 from my hospital employer

God forbid an emergency occurred, I would use those accounts in that order.
You are correct that if job loss occurred, the 457 could be used but I would only do that if 1 and 2 were depleted.

Given the unlikely scenario of the above, I have heavily invested in ETFs in 2-4.
mega317
Posts: 4582
Joined: Tue Apr 19, 2016 10:55 am

Re: Using 457 for emergency funds

Post by mega317 »

If you have 1 month of expenses saved and are worried about job loss, it's time to abandon all savings (except maybe getting a match if applicable) and build the emergency fund.

I'd go Roth before 457 but depending on the relative numbers it may not be enough. My expenses are more than 6k/month so it would take me years to build an emergency fund in your situation.

Are you saying you save no money aside from your 403b?
Hoosier CPA wrote: Mon Apr 27, 2020 1:55 pm Also, if cash is in the bank, it sometimes finds a way to be spend.
This is a problem.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
retire2022
Posts: 1834
Joined: Tue Oct 02, 2018 6:10 pm
Location: NYC

Re: Using 457 for emergency funds

Post by retire2022 »

OP

see Forbes article

https://www.forbes.com/advisor/retireme ... -covid-19/

The CARES Act allows eligible participants in certain tax-advantaged retirement plans — including 401(k)s, 403(b)s, 457s, and Traditional IRAs — to take an early distribution of up to $100,000 during calendar year 2020 without paying the 10% penalty tax the law imposes on most retirement account withdrawals before an account owner is 59 1/2. Note that this is $100,000 in total, per person, no matter how many retirement accounts you have.

In addition, the act suspends the mandatory 20% tax withholding requirement that normally applies to early distributions from a 401(k) or other workplace retirement plan. (There is no withholding requirement on early withdrawals from IRAs.)

Keep in mind that withholding isn’t a tax, but rather the IRS’s way of ensuring you ultimately pay whatever ordinary income tax you end up owing on withdrawals. Nelson warns that this aspect of the reform could create a potential tax landmine down the road if you don’t plan ahead.

“There’s no mandatory 20% withholding from an early distribution, as would normally be the case, but that does not mean that people won’t owe taxes. It’s important to budget appropriately to be able to pay your taxes,” said Nelson

The CARES act gives you extraordinary flexibility to manage the resulting tax liability. You can choose to spread the taxes owed over three years, or pay it all in 2020 if your income (and thus your tax rate) is much lower this year.

Alternatively, the CARES Act gives you up to three years to redeposit the withdrawn money into a retirement account — normally you’d have only 60 days. If you restore the retirement funds within three years, you won’t owe tax until you take distributions in retirement. You may, however, have to file an amended tax return to get back any tax you paid before redepositing the funds into retirement savings.
The CARES Act enhanced loan rules

Under normal circumstances, owners of certain workplace retirement accounts — including 401(k)s, 403(b)s, and 457 plans — are allowed to borrow up to $50,000 or 50% of their vested balance, whichever is less, from the account. Your employer doesn’t have to permit retirement plan loans, but most do. Recall that the loans may be used for any purpose whatsoever.

The CARES Act bumps the legal loan limit up to 100% of the vested balance or $100,000, whichever is less This option is available for any loans taken out during the six-month period from March 27, 2020 to September 23, 2020.

Participants must repay standard retirement account loans within five years, and you can generally expect to start repaying immediately (and remember, you’re repaying the principal and most of the interest to yourself). The CARES Act allows borrowers to forgo repayment during 2020, and starts the five-year repayment clock in 2021, giving borrowers an extra year to repay their loans. The loan will, however, continue to accrue interest in 2020.

According to Certified Financial Planner Sharif A. Muhammad, the interest rate is determined based on a certain percentage over an index-rate like Prime or the 10-Year Treasury.

“For example, many plans might use 1% over Prime. If the Prime rate is 3.25%, then the loan rate will be 1% + 3.25% — or 4.25%,” said Muhammad. Part of the interest goes back to your account, said Muhammad, but some plans may take a portion of the interest you pay as maintenance fees.
What if you lose your job after taking a loan?

Up until the Tax Cuts and Jobs Act (TCJA) took effect in 2018, loans from eligible retirement plans typically had to be repaid within 60 days of losing your job or changing employers, or they would be considered taxable distributions. However, the TCJA extended the repayment deadline in case of job loss to the day your federal tax return is due for that calendar year — with extensions. So for instance, under TCJA, if you lose your job at any time in 2020 after taking a loan from your 401(k), you have until October 15, 2021 to repay the borrowed money into a retirement account, if you don’t want it to be treated as a taxable distribution.

This is undoubtedly an improvement over the old 60-day deadline, but it might still be onerous for borrowers hit hard by the layoffs and unemployment caused by the COVID-19 pandemic.

Muhammad warns that the CARES Act offers “no specific relief for extending or deferring payments in the event that you voluntarily or involuntarily leave your job.”

However, not all plans mandate that you repay your loan so quickly. “Some plans or custodians have flexibility in allowing terminated employees to continue paying under the pre-existing repayment plan. Employees should look at their plan documents, discuss options with a benefits professional, and consult a financial advisor to understand their options,” he said.

In addition, it’s important to remember that not all retirement plan sponsors allow loans and they don’t have to. According to Nelson, each retirement plan’s rules and requirements supersede the CARES Act: “Your plan has to elect it for you to be eligible.”
The CARES Act suspends RMDs for 2020

The CARES Act has suspended required minimum distributions (RMD) for 2020. Before, individuals over the age of 70½ (for those born prior to July 1, 1949) or 72 (for those born after July 1, 1949) were required to take a minimum distribution from their tax-deferred retirement accounts each year. In addition to retirees, most non-spousal heirs who inherited tax-deferred accounts, no matter their age, were also required to take an annual RMD.

The size of your RMD is calculated taking into account your age and the balance of your tax-deferred account as of December 31 of the previous year, factored with the IRS distribution table (most account holders use IRS Table III — the Universal Lifetime Table). However, the CARES Act suspends RMDs for calendar year 2020. This provision was included to allow retirement accounts to bounce back from this year’s market downturn.

If you’ve already taken your 2020 RMD, and the distribution was within the past 60 days, the CARES Act allows you to consider the distribution an eligible rollover distribution, and put it back in your account. However, if you took your RMD more than 60 days ago, there is currently no legislation that will allow you to roll it over.
Should you withdraw funds from your retirement accounts?

The changes to the rules governing tax-advantaged retirement accounts are an unusual response to an extraordinary situation. The rules have been altered and relaxed in order to give financial flexibility to people when they need it most. But it’s still prudent to tread carefully, says Cagan. “When you sell investments during a market downturn, you have to sell more investments to get the same amount of money out, which means you end up with fewer shares left,” she states.

Her advice: if you must dip into your retirement savings, figure out the minimum you need. “Don’t take out as much as you can,” she cautions. “Only take out as much as you need.”
Topic Author
Hoosier CPA
Posts: 114
Joined: Tue Nov 22, 2016 9:43 pm

Re: Using 457 for emergency funds

Post by Hoosier CPA »

mega317 wrote: Mon Apr 27, 2020 2:16 pm If you have 1 month of expenses saved and are worried about job loss, it's time to abandon all savings (except maybe getting a match if applicable) and build the emergency fund.

I'd go Roth before 457 but depending on the relative numbers it may not be enough. My expenses are more than 6k/month so it would take me years to build an emergency fund in your situation.

Are you saying you save no money aside from your 403b?
Hoosier CPA wrote: Mon Apr 27, 2020 1:55 pm Also, if cash is in the bank, it sometimes finds a way to be spend.
This is a problem.
I've focused on debt reduction over the past few years while continuing my 403b contributions (and roll-over IRAs from past jobs). My retirement contributions are on-track for my goals. As of now though I'd like to increase emergency funds. I have some money in taxable too. So to answer your question, my savings are limited outside of retirement goals. As for the money being spent, that has just been my experience with having young kids at home - there's always something to spend money on. We are getting more disciplined and now want to increase liquid funds, now that we have no more consumer debt. Having liquidity in the event of a job loss is a new focus for me - I'm not particularly worried about it, but in my view at least, there are new unknowns right now.
terran
Posts: 1914
Joined: Sat Jan 10, 2015 10:50 pm

Re: Using 457 for emergency funds

Post by terran »

I think what you're saying is that you want to increase your emergency fund for a potential job loss, and to do that you would need to decrease contributions to your retirement account. You're suggesting that instead you could continue to contribute and invest that money in your retirement accounts and simultaneously change an amount equal to those contributions in your 457(b) (which will be eligible for withdrawal if you lose your job) to a more cash like investment to act as that emergency fund. Does that sound like what you're suggesting?

I think that's a great idea. Worst case, you're no worse off than if you had stopped contributing because you'll have money to spend until you find another job and no less in your retirement accounts than if you had stopped contributing to them. Best case, you keep your job and have more money in retirement accounts than you would have if you stopped contributing. It's basically another version of using a Roth IRA as an emergency fund.
mega317
Posts: 4582
Joined: Tue Apr 19, 2016 10:55 am

Re: Using 457 for emergency funds

Post by mega317 »

Hoosier CPA wrote: Mon Apr 27, 2020 2:29 pm I've focused on debt reduction over the past few years
So what do the numbers look like if you don't change retirement contributions but just redirect towards an emergency fund the money that was going to debt?
https://www.bogleheads.org/forum/viewtopic.php?t=6212
Topic Author
Hoosier CPA
Posts: 114
Joined: Tue Nov 22, 2016 9:43 pm

Re: Using 457 for emergency funds

Post by Hoosier CPA »

mega317 wrote: Mon Apr 27, 2020 2:43 pm
Hoosier CPA wrote: Mon Apr 27, 2020 2:29 pm I've focused on debt reduction over the past few years
So what do the numbers look like if you don't change retirement contributions but just redirect towards an emergency fund the money that was going to debt?
Good question - that will help but I'd like to move more quickly than that will allow.
mega317
Posts: 4582
Joined: Tue Apr 19, 2016 10:55 am

Re: Using 457 for emergency funds

Post by mega317 »

Ok next question--if you add the money that was formerly going to debt plus stop 403b contributions how long does it take to get to your desired emergency fund? Because if that's less than the rest of the year, then you can use all of that money to make up the difference in 403b contributions, plus Roth and/or 457 contributions before the end of the year.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
Topic Author
Hoosier CPA
Posts: 114
Joined: Tue Nov 22, 2016 9:43 pm

Re: Using 457 for emergency funds

Post by Hoosier CPA »

terran wrote: Mon Apr 27, 2020 2:40 pm I think what you're saying is that you want to increase your emergency fund for a potential job loss, and to do that you would need to decrease contributions to your retirement account. You're suggesting that instead you could continue to contribute and invest that money in your retirement accounts and simultaneously change an amount equal to those contributions in your 457(b) (which will be eligible for withdrawal if you lose your job) to a more cash like investment to act as that emergency fund. Does that sound like what you're suggesting?

I think that's a great idea. Worst case, you're no worse off than if you had stopped contributing because you'll have money to spend until you find another job and no less in your retirement accounts than if you had stopped contributing to them. Best case, you keep your job and have more money in retirement accounts than you would have if you stopped contributing. It's basically another version of using a Roth IRA as an emergency fund.
Yes, that's exactly what I'm suggesting. To put it more clearly: Assuming the amount will come from funds otherwise going to tax-deferred retirement accounts, would you: (1) pay the taxes now and increase cash on hand, (2) pay the taxes now and put the money into a ROTH account, and by doing so at least gain the tax advantages of the ROTH if the funds aren't needed for an emergency, or (3) use the 457 which would defer taxes for now and make the funds available in the event of a job loss. Just trying to think through the pros/cons. Yes, I'm looking towards expense cuts too to provide more funds for this.
retiredjg
Posts: 43133
Joined: Thu Jan 10, 2008 12:56 pm

Re: Using 457 for emergency funds

Post by retiredjg »

Hoosier CPA wrote: Mon Apr 27, 2020 1:55 pm I work for a mammoth hospital non-profit where I have a 457 plan available. Would you see any issues in using a 457 for a portion of emergency fund savings? The way I see it, in the event of a job loss, I'd could then pull the funds from the 457 as needed.
A governmental 457 plan is an excellent source of funds to use as a second or third tier emergency fund.

But it sounds like your plan is a non-governmental 457 instead. These are notorious for having limited, awkward, and inflexible withdrawal options. It is possible that your "as needed" idea will not work at all. You should check into this (and other possible downsides) of such plans before using it.
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 2:39 pm

Re: Using 457 for emergency funds

Post by Spirit Rider »

One primary purpose of an emergency (I prefer contingencies) fund is to protect against sequence of return risk.

At some level it doesn't matter what type of account your contingency funds are in. As long as they have availability given the contingency and the net amount of the distribution is at a reasonably principal stabile level.

It does you very little good if you don't have both. If you don't have availability, they provide no benefit. If the forced withdrawal locks in a 50% loss that is a tragedy.

If you use the Livesoft model and you have sufficient portfolio assets. You can rebalance with the withdrawal and other accounts and assets.

However, even this failed in 2008 - 2009, because most inverse correlated assets failed to perform as expected causing far greater draw downs than would have occurred with relatively principal stable assets.

I was "lucky" in that I had prolonged un/under employment 2001 - 2002 and 2009 - 2010. If I had to make withdrawals at 50% and 60% losses it would have devastated my portfolio. I was very glad I had mult-tiered sources of money and never had to sell a single security to make ends meet.
Topic Author
Hoosier CPA
Posts: 114
Joined: Tue Nov 22, 2016 9:43 pm

Re: Using 457 for emergency funds

Post by Hoosier CPA »

retiredjg wrote: Mon Apr 27, 2020 2:59 pm
Hoosier CPA wrote: Mon Apr 27, 2020 1:55 pm I work for a mammoth hospital non-profit where I have a 457 plan available. Would you see any issues in using a 457 for a portion of emergency fund savings? The way I see it, in the event of a job loss, I'd could then pull the funds from the 457 as needed.
A governmental 457 plan is an excellent source of funds to use as a second or third tier emergency fund.

But it sounds like your plan is a non-governmental 457 instead. These are notorious for having limited, awkward, and inflexible withdrawal options. It is possible that your "as needed" idea will not work at all. You should check into this (and other possible downsides) of such plans before using it.
Thanks. I'll look into that. The ROTH option would be more flexible, just with paying the taxes now as opposed to upon withdrawal.
BackToSchoolDad
Posts: 105
Joined: Wed Mar 18, 2020 6:33 pm

Re: Using 457 for emergency funds

Post by BackToSchoolDad »

Curious to hear more thoughts on using the 457 as an emergency fund, I think it makes a lot of sense in my situation.
For reference I work in State government so a secure job and the 457 is governmental, I'll have access to it immediately upon severing employment.

We've got 4ish months of emergency fund in a savings account, which we're comfortable with. There are some upgrades around the house, honeymoon/vacation post Covid, and other things we'd like to earmark those funds for, but I don't want to stop my 457 contributions and the tax deferral as it helps my student loan payments a lot.

My thought is to just channel all new 457 contributions into Vanguard Total Bond. Once that hits 3 months of EF I'll go back to purchasing equities. That would free up the money in the savings account and boost the EF.
Total Bond is the only fixed income option available aside from a guaranteed interest fund. I'm okay with the slight risk from Total Bond, and the info on the guaranteed interest fund is really sparse which makes me leery to invest in it.

After thinking on this for a couple days I can't really think of much downside to this plan. Is this a reasonable move in my situation?
User avatar
Clever_Username
Posts: 1779
Joined: Sun Jul 15, 2012 12:24 am
Location: Southern California

Re: Using 457 for emergency funds

Post by Clever_Username »

BackToSchoolDad wrote: Wed Jul 15, 2020 6:37 pm Curious to hear more thoughts on using the 457 as an emergency fund, I think it makes a lot of sense in my situation.
For reference I work in State government so a secure job and the 457 is governmental, I'll have access to it immediately upon severing employment.

We've got 4ish months of emergency fund in a savings account, which we're comfortable with. There are some upgrades around the house, honeymoon/vacation post Covid, and other things we'd like to earmark those funds for, but I don't want to stop my 457 contributions and the tax deferral as it helps my student loan payments a lot.

My thought is to just channel all new 457 contributions into Vanguard Total Bond. Once that hits 3 months of EF I'll go back to purchasing equities. That would free up the money in the savings account and boost the EF.
Total Bond is the only fixed income option available aside from a guaranteed interest fund. I'm okay with the slight risk from Total Bond, and the info on the guaranteed interest fund is really sparse which makes me leery to invest in it.

After thinking on this for a couple days I can't really think of much downside to this plan. Is this a reasonable move in my situation?
Yeah, I have about a year's worth of expenses in my 457 (government employer). Right now, it's 100% stocks. I'm debating if I should redirect it, as I do have some bonds elsewhere in pre-tax. It's a tier in my emergency plan, for sure.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.
BackToSchoolDad
Posts: 105
Joined: Wed Mar 18, 2020 6:33 pm

Re: Using 457 for emergency funds

Post by BackToSchoolDad »

Clever_Username wrote: Wed Jul 15, 2020 7:01 pm Yeah, I have about a year's worth of expenses in my 457 (government employer). Right now, it's 100% stocks. I'm debating if I should redirect it, as I do have some bonds elsewhere in pre-tax. It's a tier in my emergency plan, for sure.
I don't have bonds anywhere else which is one of my considerations, I've yet to put anything in taxable aside from this savings account as well.
retiredjg
Posts: 43133
Joined: Thu Jan 10, 2008 12:56 pm

Re: Using 457 for emergency funds

Post by retiredjg »

BackToSchoolDad wrote: Wed Jul 15, 2020 6:37 pm Curious to hear more thoughts on using the 457 as an emergency fund....
This only works once you leave the employer that offers the governmental 457.

Since the money is available without penalty at any age after you leave the employer, it can function as a 2nd or 3rd tier emergency fund.
User avatar
7th_Diagram
Posts: 52
Joined: Fri Jan 25, 2019 11:37 pm

Re: Using 457 for emergency funds

Post by 7th_Diagram »

I leverage my governmental 457b as my second tier emergency fund. Second tier = job loss
"You have to understand, most people are not ready to be unplugged,and many of them are so injured, so hopelessly dependent upon the system, that they will fight to protect it." | ~Morpheus
User avatar
7th_Diagram
Posts: 52
Joined: Fri Jan 25, 2019 11:37 pm

Re: Using 457 for emergency funds

Post by 7th_Diagram »

*duplicate*
"You have to understand, most people are not ready to be unplugged,and many of them are so injured, so hopelessly dependent upon the system, that they will fight to protect it." | ~Morpheus
User avatar
avenger
Posts: 893
Joined: Mon Dec 02, 2013 12:11 pm

Re: Using 457 for emergency funds

Post by avenger »

My entire governmental 457 is in a stable value find yielding about 3%. It contains 4 years worth of expenses in it.

Spend some time learning more details about your stable value fund. You might find it is a good one. For example, mine is guaranteed by two different A-rated insurance companies.

It might be a better choice than the bond fund.
cheers ... -Mark | "Our life is frittered away with detail. Simplify. Simplify." -Henry David Thoreau | [VTI, VXUS, VWITX, SV fund]
User avatar
Clever_Username
Posts: 1779
Joined: Sun Jul 15, 2012 12:24 am
Location: Southern California

Re: Using 457 for emergency funds

Post by Clever_Username »

avenger wrote: Wed Jul 15, 2020 8:27 pm My entire governmental 457 is in a stable value find yielding about 3%. It contains 4 years worth of expenses in it.

Spend some time learning more details about your stable value fund. You might find it is a good one. For example, mine is guaranteed by two different A-rated insurance companies.

It might be a better choice than the bond fund.
None in mine, but a "savings fund." YTD +0.79%. Just the same, I wouldn't have looked into it if you hadn't said this, and I'm glad I know it's there. Thanks!
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.
BackToSchoolDad
Posts: 105
Joined: Wed Mar 18, 2020 6:33 pm

Re: Using 457 for emergency funds

Post by BackToSchoolDad »

avenger wrote: Wed Jul 15, 2020 8:27 pm My entire governmental 457 is in a stable value find yielding about 3%. It contains 4 years worth of expenses in it.

Spend some time learning more details about your stable value fund. You might find it is a good one. For example, mine is guaranteed by two different A-rated insurance companies.

It might be a better choice than the bond fund.
It appears this one is guaranteed by an AA rated insurance company, interest rate 1.75% which seems pretty good these days. Do the rates on these fluctuate like a savings account?

I don't know anything about guaranteed interest funds so I'm gonna have to research them some more.

Presumably I would get more growth from Total Bond even at its current low yields?
User avatar
avenger
Posts: 893
Joined: Mon Dec 02, 2013 12:11 pm

Re: Using 457 for emergency funds

Post by avenger »

They do tend to fluctuate, although much more slowly than your savings accounts.

I will leave the question re: yield up to someone much smarter than me. Yield and risk tend to go hand-in-hand, however.
cheers ... -Mark | "Our life is frittered away with detail. Simplify. Simplify." -Henry David Thoreau | [VTI, VXUS, VWITX, SV fund]
Post Reply